Working Paper: CEPR ID: DP17801
Authors: Alessandro Ferrari; Sébastien Laffitte; Mathieu Parenti; Farid Toubal
Abstract: International tax rules are commonly viewed as obsolete as multinational corporations exploit loopholes to move their profits to tax havens. This paper uncovers how international tax reforms can curb profit shifting and impact real income and welfare across nations.We build a model of international corporate tax avoidance under imperfect competition that disentangles profits that stem from real economic activity from paper profits that are booked in tax havens. Our framework delivers a set of ``triangle identities'' through which we recover bilateral profit-shifting flows. Using different data sources ranging from publicly available to firm-level datasets, we find an elasticity of paper profits that is three times larger than the elasticity of the tax base. In our quantitative model, a global minimum tax increases welfare by inducing higher tax revenues and public good provision. It also encourages countries to raise their statutory corporate tax rates as it effectively reduces tax competition. Instead, a border adjustment tax (BAT) that eliminates profit shifting distorts multinational production and may result in welfare losses. A tax reform in the spirit of the destination-based cash-flow tax, combining a BAT with a reduction in the corporate income tax rate may induce efficiency gains at the expense of public good provision.
Keywords: profit shifting; tax avoidance; tax havens; international tax reforms; minimum taxation; DBCFT; multinational firms
JEL Codes: F23; H25; H26; H32; H73
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| international tax reforms (F38) | reduce profit shifting (H22) |
| reduce profit shifting (H22) | enhance real income and welfare across nations (F61) |
| global minimum tax (F38) | increase welfare (I38) |
| global minimum tax (F38) | raise tax revenues (H29) |
| raise tax revenues (H29) | improve public good provision (H42) |
| border adjustment tax (BAT) (H25) | distort multinational production (F12) |
| distort multinational production (F12) | welfare losses (D69) |
| tax reform combining BAT and reduction in corporate income tax rates (H29) | yield efficiency gains (D61) |
| tax reform combining BAT and reduction in corporate income tax rates (H29) | expense of public good provision (H49) |
| closure of a tax haven (H26) | negatively impacts real income of non-haven countries (F69) |
| global minimum tax (F38) | does not entirely eliminate profit shifting (H22) |
| anti-abuse laws (K42) | mitigate adverse effects of tax reforms (H23) |
| countries (O57) | have incentives to raise statutory tax rates following global minimum tax (H26) |